Revised Circular Debt Management Plan: Additional financial cost surcharge for payment of markup proposed

ISLAMABAD: Rejecting the “unrealistic” financial assumptions used by the Power Division in preparation of revised Circular Debt Management Plan (CDMP), Finance Ministry has proposed imposition of additional financial cost surcharge for payment of markup, well informed sources in Finance Ministry told Business Recorder.

“The underlying assumption used for the revised CDMP, does not represent current economic realities, particularly with respect to KIBOR and exchange rates. These two factors can contribute significantly towards build-up of circular debt,” the sources quoted a Finance Division representative as commenting on power sector circular debt report to be placed before the CCoE.

Finance Ministry said, Power Division should use realistic assumption to see the impact on stock and flow of circular debt and accordingly further mitigation measures may be proposed, if required.

The country’s circular debt has touched Rs 2.5 trillion due to some deviations in the measures agreed with the lenders.

Power Division had sent revised CDMP to Cabinet Division for onward submission before the CCoE. The Cabinet Division, however, asked Power Division to seek comments from Finance Division before sending it to the CCoE for consideration and approval.

According to sources, Finance Division has examined the Plan where financial obligations of revised CDMP may be fulfilled by this Division under the following contents of the CDMP. Finance Division supports the revised CDMP subject to the following issues concerning the fiscal complication:

On subsidies, Finance Division is of the view that provision of electricity to AJK will be made on bulk rate which has already been approved by the ECC/Cabinet March 20, 2019, which may be implemented within 30 days after approval of the Revised CDMP. After implementation, this will reduce the subsidy more than Rs 50 billion annually.

Changes in $ rate, CPI and fuel mix: Circular debt management plan recalibrated

Finance Division, according to sources, maintained that pursuant to the Prime Minister’s directives of May 12, 2020 to review and reorient subsidies in a manner to be more targeted and focused, therefore, retargeting of subsidy will also help in reduction of subsidy in TDS. Power Division will also provide plan to rationalize subsidy on account of Industrial Support Package (ISP), Zero Rated Industry (ZRI), FATA & Agri-tube wells etc.

For ascertaining outstanding subsidy of each financial year for appropriate amount of budgeting, Power Division has been asked to hold reconciliation with Finance Division under different head of categories on quarterly basis.

Regarding budgeting of subsidy requirements with justification will be submitted in February of each calendar year for the subsequent FY along with current financial year revised estimates. However, if any, outstanding requirements of previous years (s) to be shown separately.

The sources said Auditor General to be requested to carry out Special Audit of subsidy claims of all categories after completion of financial year regularly.

According to Finance Division, it has been observed that against the allocation of Rs330 billion for power subsidy, Power Division has released Rs113.654 billion which is 24.45 percent of the total allocation, therefore, if any subsidy claims of CFY 2021-22 are pending till December 2021, these may be processed immediately.

PHL Markup - In accordance with the ECC/Cabinet decisions, PHL debt of Rs 804 billion has been picked up by the GoP as a public debt and accordingly Rs 72.635 billion were repaid to banks during FY 2020-21 and Rs 130 billion has been earmarked during CFY 2021-22. Further, for the forthcoming FY 2022-23, Rs 164 billion will be allocated after deliberation with Power Division regarding modalities of payments of PHL debt.

Settlement of 1PPs Stock/Markup - Regarding settlement of IPPs, Rs 90 billion was provided to Power Division during FY 2020-21, while out of Rs 311 billion in CFY 2021-22, Rs 199 billion has been transferred to Power Division and remaining amount of Rs 112 billion will be released during the fourth quarter.

However, revised CDMP provides that Rs 297 billion will be required during FY 2022-23, Power Division may apprise CCoE and Finance Division about this requirement.

Govt eyes further Rs2/unit hike in base power tariff

Regarding payment of markup, Finance Division has apprised that after taking PHL debt as a Public debt, ECC/Cabinet also approved that Power Division/PHL shall continue to pay markup recovered through tariff and in case of shortfall will either be met through DS surcharge or efficiency gains.

In this connection, necessary amendment in Nepra Act has been made through an Ordinance in March, 2021, therefore, additional financial cost surcharge of markup payment may be imposed with the approval of the ECC/Cabinet in accordance with the Ordinance, keeping in view the savings/gains in the present Debt Servicing (DS) surcharge due to rollover of Syndicate Term Finance Facility (s) (STFFs) and repayment of PHL’s debt. Finance Division will not support the provision of markup through budgetary mechanism due to financial constraints.

Pursuant to the ECC’s decision of July, 2021, non-cash settlement to be carried out during forthcoming financial year 2022-23, after provision of budgetary allocation and reconciliation among Power Division, Finance Division and Economic Affairs Division.

Finance Division further stated that non-payment from K-Electric- for the CFY 2021-22, an amount of Rs56 billion has exclusively been earmarked for K-Electric Tariff Differential Subsidy (TDS), however, till date no funds have been released on this account. Power Division may resolve the pending issues of K-Electric immediately and may release the outstanding claims, if any.

Discos’ losses - Finance Division is of the view that it is essentially required that additional efforts to be made by the Power Division in restricting the line losses strictly in line with the Nepra determination to control the increase of its flow in circular debt so the targets of improvement plan of line/distribution losses to be achieved.

In addition to this, Nepra should timely determine the distribution tariff in the stipulated period of time given in the Nepra’s Act so the adverse impact in the circular debt accumulation due to late determination of tariff will be minimized.

Finance Division is further of the view that its comments may become part of the revised CDMP, to be published in the official gazette after its approval from the competent forum.

Copyright Business Recorder, 2021